16 September 2019

Financial Markets Policy

Building, Resources and Markets

Ministry of Business, Innovation & Employment

PO Box 1473

Wellington 6140

By email: defaultkiwisaver@mbie.govt.nz

Dear Sir/Madam

REVIEW OF KIWISAVER DEFAULT PROVIDER ARRANGEMENTS: SUBMISSION

Thank you for the opportunity to provide feedback on the review of KiwiSaver default provider

arrangements.

In addition to our answers to your specific questions, we want to highlight the three most important

considerations, in our opinion, for this review:

1. Investment mandate

The decision to select a conservative asset allocation for KiwiSaver default funds over 12 years ago

has had a devastating impact on members.

Our research indicates that, using return rate data from the past 20 plus years, a balanced asset

allocation is the most appropriate option for default funds.

We have graphically shown the financial outcomes over a member’s working lifetime, comparing the

different fund types of conservative, balanced, growth and lifestages. . The balanced fund outcome

(or “Master” is shown by the bars, the other types by the lines) The assumptions and data tables

used are detailed separately. We have used median income information by age groups from Statistics

NZ dated 2017. The graph does not take into account return variability as they are based on long-run

averages. Volatility analysis would further demonstrate why lifestages (or growth) are unsuitable

options.

There are numerous other issues with a lifestages approach which make it unsuitable for the

Government to use for default funds, including:

Very few KiwiSaver providers currently offer lifestages options, and there is a large level of

disparity between the asset allocations and age stages used;

The starting asset allocation for lifestages options is typically either aggressive or growth, which

are entirely unsuitable for members who may wish to utilise the first home withdrawal option

after three years of membership. In addition, KiwiSaver is likely to be a default member’s first

non-bank financial asset and with limited financial literacy/education provided to school-leavers

it is incorrect to assume that these choices are appropriate for such a large group of people that

are likely to withdraw within a few years;

There will inevitable be a need for the Government to makes arbitrary decisions about how

lifestages will be applied in default funds both in terms of timing and fund types. It is simply an

inappropriate decision for the Government to make, as there is no industry consensus and no

average right answers. It is important to note that the relative importance of default funds to

the total KiwiSaver market has been trending downward and is now around 13%. Members’

knowledge and engagement with KiwiSaver has been constantly improving, which is likely to

drive this percentage lower, so it does not warrant the additional confusion, complexity and

regulation in attempting to implement that in the default funds.

It is extremely difficult for members to compare lifestages options with any other fund type or

option, or even other lifestages fund. This removes transparency and manager accountability

which would suit the industry but not the members;

Lifestages is an attempt by fund managers to add value by purporting to make adjustments that

will assist the member. These adjustments do not add value to the member, who needs to be

educated about the relative merits of the particular fund type they should use given their

circumstances. As long-established financial advisers, we find that over time, clients acquire

knowledge and resilience to financial events. With an aging population, the concept that value is

added as members approach retirement by shifting to more conservative allocations is often

completely inappropriate given their life expectancy.

Default funds are designed as ‘temporary’ holding spaces, not a lifetime plan. We want New

Zealanders to take responsibility for their own retirement. Lifestages implies that the default

manager has a good solution for the member throughout their lifetime, when in most cases, they

do not.

2. Over-taxation

Since the commencement of KiwiSaver and as at right now, auto-enrolled KiwiSaver members are

generally over-taxed. The reason for this is that they are taxed at the default rate of 28% and not

their own rate (10.5% or 17.5% based on their previous two years income). This has adversely

affected the youngest and the least financially literate New Zealanders.

The IRD failed in the auto-enrolment process to advise members or employers in all its

documentation about PIR rates and the need for members to adjust these after the auto-enrolment

process was complete. Not a single comment about PIR rates or the need to change them, despite

the guides talking about future responsibilities. The documents are:

KS1 (the employer form sent to the IRD for enrolment)

KS2 (the authority given by the employee to the employer to start KiwiSaver contributions)

KS3 (information for employees about KiwiSaver)

KS4 (guide for employers about KiwiSaver Welcome letter to members The default KiwiSaver providers’ inability to engage with and transfer members out of default funds

means that this problem persisted.

3. Failure by default providers to meet contractual obligations

Default KiwiSaver providers have generally failed to meet their contractual obligations to move

clients out of the ‘temporary’ default funds. This because many are deeply conflicted, particularly the

Australian-owned banks, which are some of the biggest default funds. Our analysis of their default

fund portfolios in July 2018 showed oligopoly behaviour with significant placement of funds in bank

term deposits.

There has been no set performance standard. The review needs to set for a default provider very

specific performance standards in terms of shifting members out of their default funds. To this must

be added automatic consequences for non-performance, such as stopping the flow of new default

members to their fund. This could be done on a quarterly basis to rapidly correct underperforming

default funds. If the member exit performance target is set significantly higher than their inflows,

inevitably this would lead to a decline in default fund membership, exactly the outcome the

Government desires. The exit rates could be set higher for the existing largest default fund providers,

who have not performed, being AMP, ANZ, ASB, Fisher Funds and Mercer. The failure to perform to

the quarterly target automatically results in the loss of new default members for the following

quarter. Such a mechanism would ensure results with minimal regulation or oversight from the FMA.

This concept would achieve better outcomes for a large number of New Zealanders provided the

performance standard required was strong. It could be supplemented by automatic withdrawals of

the longest members in their funds, if the underperformance continued for two or three consecutive

quarters.

We would be delighted to support our submission in person in front of the committee, and to answer

any questions that members might have.

Kind regards

John Cliffe Rachelle Bland AUTHORISED FINANCIAL ADVISER AUTHORISED FINANCIAL ADVISER

DISCRETIONARY INVESTMENT MANAGEMENT SERVICE

M: 027 478 0320 E: john@cliffeconsulting.co.nz M: 021 631 327 E: rachelle@cliffeconsulting.co.nz

Comparison of financial outcomes for KiwiSaver default members

Planning Assumptions

Age range (years) Weekly gross earning 1, 4 PIR rate

Member contributions (monthly) 2

Employer contributions (monthly) 2

Government contribution (annual) 4

Fund type used for Lifestages

18 -29 $864 17.5% 112.63 92.92 521.43 Growth

30-39 $1,193 28% 155.52 111.97 521.43 Balanced Growth

40-49 $1,312 28% 171.03 123.14 521.43 Balanced

50-59 $1,293 28% 168.55 121.36 521.43 Moderate

60+ $1,026 28% 133.75 96.30 521.43 Conservative

1 Based on median earnings from 2017, Statistics NZ

2 Assumes 3% member contribution, and 3% employer contribution (less Employer Superannuation Contribution Tax)

3 Assumes earnings, member and employer contributions increase by the rate of inflation at 2.5%, Government contributions are not inflation

adjusted.

4 We have not added any additional fee costs in lifestages for the costs involved in implementing the changing asset allocation.

Return Rate Assumptions

Long-run, linear return rates for different fund types have been used as follows:

Annual Return Rates (after manager fees)

Fund Type Gross After tax at 17.5%

After tax at 28%

Indicative Asset Allocation

Conservative 6.20% 5.1% 4.5% 20% Growth, 80% Defensive

Moderate 6.80% 5.6% 4.9% 40% Growth, 60% Defensive

Balanced (Master) 7.5% 6.2% 5.4% 60% Growth, 40% Defensive

Balanced Growth 7.75% 6.4% 5.6% 70% Growth, 30% Defensive

Growth 8.00% 6.6% 5.8% 80% Growth, 20% Defensive

Master (Balanced)

Yearly

Year Opening

Balance Contributions Withdrawals 1 Earnings Balance

Weighted

Return Rate

2019 0 2,993 0 101 3,094 6.20% 2020 0 3,056 0 300 6,450 6.20% 2021 0 3,120 0 517 10,086 6.20% 2022 0 3,185 0 751 14,023 6.20% 2023 0 3,253 0 1,004 18,280 6.20% 2024 0 3,322 0 1,278 22,880 6.20% 2025 0 3,393 0 1,574 27,847 6.20% 2026 0 3,465 0 1,894 33,206 6.20% 2027 0 3,540 0 2,238 38,983 6.20% 2028 0 3,616 0 2,609 45,208 6.20% 2029 0 3,694 0 3,009 51,911 6.20% 2030 0 3,774 0 3,439 59,125 6.20% 2031 0 3,857 0 3,902 66,884 6.20% 2032 0 71,317 66,884 3,834 75,151 5.40% 2033 0 5,066 0 4,310 84,527 5.40% 2034 0 5,181 0 4,832 94,539 5.40% 2035 0 5,299 0 5,390 105,228 5.40% 2036 0 5,420 0 5,985 116,632 5.40% 2037 0 5,543 0 6,620 128,796 5.40% 2038 0 5,670 0 7,297 141,764 5.40% 2039 0 5,801 0 8,019 155,583 5.40% 2040 0 5,934 0 8,788 170,305 5.40% 2041 0 6,071 0 9,607 185,983 5.40% 2042 0 6,787 0 10,496 203,266 5.40% 2043 0 6,945 0 11,457 221,669 5.40% 2044 0 7,108 0 12,481 241,258 5.40% 2045 0 7,274 0 13,570 262,102 5.40% 2046 0 7,445 0 14,729 284,277 5.40% 2047 0 7,620 0 15,962 307,859 5.40% 2048 0 7,800 0 17,273 332,932 5.40% 2049 0 7,984 0 18,666 359,582 5.40% 2050 0 8,173 0 20,147 387,902 5.40% 2051 0 8,366 0 21,721 417,988 5.40% 2052 0 8,455 0 23,389 449,832 5.40% 2053 0 8,655 0 25,157 483,644 5.40% 2054 0 8,861 0 27,035 519,541 5.40% 2055 0 9,072 0 29,029 557,642 5.40% 2056 0 9,288 0 31,144 598,074 5.40% 2057 0 9,510 0 33,389 640,973 5.40% 2058 0 9,737 0 35,770 686,481 5.40% 2059 0 9,970 0 38,297 734,748 5.40% 2060 0 10,209 0 40,976 785,933 5.40% 2061 0 10,454 0 43,816 840,203 5.40% 2062 0 8,598 0 46,765 895,567 5.40% 2063 0 8,803 0 49,836 954,206 5.40% 2064 0 9,012 0 53,088 1,016,307 5.40% 2065 0 9,227 0 56,533 1,082,066 5.40% 2066 0 9,447 0 60,179 1,151,692 5.40% 2067 0 9,152 0 64,026 1,224,870 5.40% 2068 0 9,383 0 68,084 1,302,337 5.40% 2069 0 9,620 0 72,379 1,384,337 5.40% 2070 0 9,864 0 76,926 1,471,126 5.40% 2071 0 10,113 0 81,738 1,562,977 5.40%

1 To adjust return rate

Scenario One (Conservative)

Yearly

Year Opening Balance

Contributions Withdrawals 1 Earnings Balance Weighted

Return Rate 2019 0 2,993 0 83 3,076 5.10% 2020 0 2,993 0 243 6,312 5.10% 2021 0 2,993 0 412 9,718 5.10% 2022 0 2,993 0 590 13,301 5.10% 2023 0 2,993 0 777 17,071 5.10% 2024 0 2,993 0 974 21,038 5.10% 2025 0 2,993 0 1,181 25,212 5.10% 2026 0 2,993 0 1,399 29,604 5.10% 2027 0 2,993 0 1,628 34,226 5.10% 2028 0 2,993 0 1,870 39,088 5.10% 2029 0 2,993 0 2,124 44,205 5.10% 2030 0 2,993 0 2,391 49,589 5.10% 2031 0 2,993 0 2,672 55,253 5.10% 2032 0 65,257 61,532 2,590 61,568 4.43% 2033 0 3,725 0 2,878 68,172 4.44% 2034 0 3,725 0 3,180 75,077 4.44% 2035 0 3,725 0 3,495 82,297 4.44% 2036 0 3,725 0 3,825 89,847 4.45% 2037 0 3,725 0 4,170 97,741 4.45% 2038 0 3,725 0 4,530 105,996 4.45% 2039 0 3,725 0 4,907 114,628 4.45% 2040 0 3,725 0 5,301 123,654 4.45% 2041 0 3,725 0 5,713 133,093 4.46% 2042 0 4,049 0 6,152 143,294 4.46% 2043 0 4,049 0 6,618 153,961 4.46% 2044 0 4,049 0 7,105 165,115 4.46% 2045 0 4,049 0 7,614 176,778 4.46% 2046 0 4,049 0 8,147 188,974 4.46% 2047 0 4,049 0 8,704 201,727 4.46% 2048 0 4,049 0 9,286 215,063 4.46% 2049 0 4,049 0 9,895 229,007 4.46% 2050 0 4,049 0 10,532 243,588 4.46% 2051 0 4,049 0 11,198 258,835 4.46% 2052 0 4,001 0 11,893 274,730 4.46% 2053 0 4,001 0 12,619 291,350 4.47% 2054 0 4,001 0 13,378 308,729 4.47% 2055 0 4,001 0 14,172 326,901 4.47% 2056 0 4,001 0 15,002 345,904 4.47% 2057 0 4,001 0 15,869 365,774 4.47% 2058 0 4,001 0 16,777 386,552 4.47% 2059 0 4,001 0 17,725 408,278 4.47% 2060 0 4,001 0 18,718 430,997 4.47% 2061 0 4,001 0 19,755 454,753 4.47% 2062 0 3,281 0 20,822 478,856 4.47% 2063 0 3,281 0 21,923 504,060 4.47% 2064 0 3,281 0 23,073 530,414 4.47% 2065 0 3,281 0 24,277 557,972 4.47% 2066 0 3,281 0 25,535 586,788 4.47% 2067 0 2,760 0 26,839 616,386 4.47% 2068 0 2,760 0 28,190 647,336 4.47% 2069 0 2,760 0 29,603 679,699 4.47% 2070 0 2,760 0 31,080 713,540 4.47% 2071 0 2,760 0 32,625 748,925 4.47%

1 To adjust return rate

Scenario Two (Growth)

Yearly

Year Opening Balance

Contributions Withdrawals 1 Earnings Balance Weighted

Return Rate 2019 0 2,993 0 108 3,101 6.60% 2020 0 3,056 0 321 6,477 6.60% 2021 0 3,120 0 553 10,149 6.60% 2022 0 3,185 0 805 14,140 6.60% 2023 0 3,253 0 1,079 18,472 6.60% 2024 0 3,322 0 1,376 23,170 6.60% 2025 0 3,393 0 1,699 28,261 6.60% 2026 0 3,465 0 2,048 33,774 6.60% 2027 0 3,540 0 2,425 39,739 6.60% 2028 0 3,616 0 2,834 46,188 6.60% 2029 0 3,694 0 3,276 53,158 6.60% 2030 0 3,774 0 3,753 60,685 6.60% 2031 0 3,857 0 4,268 68,810 6.60% 2032 0 73,764 68,810 4,256 78,019 5.80% 2033 0 5,066 0 4,808 87,893 5.80% 2034 0 5,181 0 5,400 98,474 5.80% 2035 0 5,299 0 6,034 109,807 5.80% 2036 0 5,420 0 6,713 121,939 5.80% 2037 0 5,543 0 7,439 134,922 5.80% 2038 0 5,670 0 8,217 148,810 5.80% 2039 0 5,801 0 9,048 163,659 5.80% 2040 0 5,934 0 9,937 179,530 5.80% 2041 0 6,071 0 10,887 196,488 5.80% 2042 0 6,787 0 11,920 215,195 5.80% 2043 0 6,945 0 13,039 235,179 5.80% 2044 0 7,108 0 14,235 256,522 5.80% 2045 0 7,274 0 15,512 279,308 5.80% 2046 0 7,445 0 16,874 303,628 5.80% 2047 0 7,620 0 18,329 329,576 5.80% 2048 0 7,800 0 19,880 357,256 5.80% 2049 0 7,984 0 21,535 386,775 5.80% 2050 0 8,173 0 23,299 418,246 5.80% 2051 0 8,366 0 25,180 451,792 5.80% 2052 0 8,455 0 27,181 487,428 5.80% 2053 0 8,655 0 29,310 525,394 5.80% 2054 0 8,861 0 31,578 565,833 5.80% 2055 0 9,072 0 33,994 608,898 5.80% 2056 0 9,288 0 36,566 654,753 5.80% 2057 0 9,510 0 39,304 703,567 5.80% 2058 0 9,737 0 42,219 755,524 5.80% 2059 0 9,970 0 45,322 810,816 5.80% 2060 0 10,209 0 48,623 869,648 5.80% 2061 0 10,454 0 52,135 932,238 5.80% 2062 0 8,598 0 55,804 996,640 5.80% 2063 0 8,803 0 59,647 1,065,090 5.80% 2064 0 9,012 0 63,731 1,137,833 5.80% 2065 0 9,227 0 68,071 1,215,131 5.80% 2066 0 9,447 0 72,682 1,297,260 5.80% 2067 0 9,152 0 77,566 1,383,978 5.80% 2068 0 9,383 0 82,739 1,476,101 5.80% 2069 0 9,620 0 88,234 1,573,956 5.80% 2070 0 9,864 0 94,071 1,677,891 5.80% 2071 0 10,113 0 100,270 1,788,274 5.80%

1 To adjust return rate

Scenario Three (Lifestages)

Yearly

Year Opening Balance

Contributions Withdrawals 1 Earnings Balance Weighted

Return Rate 2019 0 2,993 0 108 3,101 6.60% 2020 0 3,056 0 321 6,477 6.60% 2021 0 3,120 0 553 10,149 6.60% 2022 0 3,185 0 805 14,140 6.60% 2023 0 3,253 0 1,079 18,472 6.60% 2024 0 3,322 0 1,376 23,170 6.60% 2025 0 3,393 0 1,699 28,261 6.60% 2026 0 3,465 0 2,048 33,774 6.60% 2027 0 3,540 0 2,425 39,739 6.60% 2028 0 3,616 0 2,834 46,188 6.60% 2029 0 3,694 0 3,276 53,158 6.60% 2030 0 3,774 0 3,753 60,685 6.60% 2031 0 3,857 0 4,268 68,810 6.60% 2032 0 73,764 68,810 4,105 77,869 5.60% 2033 0 5,066 0 4,629 87,564 5.60% 2034 0 5,181 0 5,190 97,935 5.60% 2035 0 5,299 0 5,790 109,024 5.60% 2036 0 5,420 0 6,430 120,874 5.60% 2037 0 5,543 0 7,115 133,532 5.60% 2038 0 5,670 0 7,846 147,049 5.60% 2039 0 5,801 0 8,627 161,477 5.60% 2040 0 5,934 0 9,460 176,871 5.60% 2041 0 6,071 0 10,349 193,292 5.60% 2042 0 200,079 193,292 10,901 210,979 5.40% 2043 0 6,945 0 11,884 229,809 5.40% 2044 0 7,108 0 12,932 249,848 5.40% 2045 0 7,274 0 14,046 271,169 5.40% 2046 0 7,445 0 15,231 293,845 5.40% 2047 0 7,620 0 16,492 317,957 5.40% 2048 0 7,800 0 17,832 343,589 5.40% 2049 0 7,984 0 19,256 370,829 5.40% 2050 0 8,173 0 20,770 399,771 5.40% 2051 0 8,366 0 22,378 430,515 5.40% 2052 0 438,970 430,515 21,802 460,772 4.90% 2053 0 8,655 0 23,324 492,751 4.90% 2054 0 8,861 0 24,932 526,544 4.90% 2055 0 9,072 0 26,631 562,248 4.90% 2056 0 9,288 0 28,426 599,962 4.90% 2057 0 9,510 0 30,323 639,795 4.90% 2058 0 9,737 0 32,325 681,857 4.90% 2059 0 9,970 0 34,439 726,267 4.90% 2060 0 10,209 0 36,671 773,147 4.90% 2061 0 10,454 0 39,027 822,629 4.90% 2062 0 831,227 822,629 38,003 869,230 4.50% 2063 0 8,803 0 40,149 918,182 4.50% 2064 0 9,012 0 42,403 969,597 4.50% 2065 0 9,227 0 44,770 1,023,593 4.50% 2066 0 9,447 0 47,256 1,080,296 4.50% 2067 0 9,152 0 49,855 1,139,303 4.50% 2068 0 9,383 0 52,571 1,201,257 4.50% 2069 0 9,620 0 55,423 1,266,301 4.50% 2070 0 9,864 0 58,417 1,334,582 4.50% 2071 0 10,113 0 61,560 1,406,255 4.50%

1 To adjust return rate

Submission template: Review of KiwiSaver default provider arrangements

Cliffe Consulting Limited

Section 1: Your details

Name of contact person: John Cliffe

Organisation (if applicable): Cliffe Consulting Limited

Contact email address: john@cliffeconsulting.co.nz

Are you requesting that any of this submission be kept confidential? No

If yes, please let us know why the information should be kept confidential in accordance with the

Official Information Act. Please also send us a redacted version of your submission for publication.

Reasons for withholding:

Section 2: Feedback on discussion paper

What is your feedback on the proposed objective for the review? 1.

The objectives are excellent

What is your feedback on the proposed criteria for the review? How should the criteria be 2.weighted?

Criteria should be weighted as follows:

60% Better financial position for KiwiSaver default members, particularly at retirement

20% Trust and confidence in KiwiSaver

15% Support development of NZ’s capital markets that contribute to individuals’ well-being

5% Low administration and compliance costs

0% Promote innovation, competition and value-for-money across KiwiSaver

Yes, competition and value for money are important, but innovation in investments is a

negative, as the industry has a history of failing fads in investment strategies. Some of the currently

fashionable themes are likely to fade. For example, life stages – because this makes no makes flawed

assumptions about individuals’ risk tolerance, education levels and needs. There have been many

investment styles that have proved failures such as contrarian, absolute return strategies, capital

guaranteed strategies, annuities have a checkered or failed history, momentum investing.

We think default KiwiSaver schemes should invest in a proven methodology and not attempt to be

innovative in an attempt to enhance returns as these do not withstand academic scrutiny. Rather if

individuals wish to be innovative, they take that risk and actively elect to use to do that, rather than

by a Government-selected default scheme.

What is your feedback on the problem definition for the investment mandate? Is a move 3.away from a “parking space” purpose justified?

The “parking space” concept has totally failed, to the detriment of hundreds of thousands of

KiwiSaver members, largely because the main KiwiSaver suppliers (trading banks and AMP) were

completely conflicted with regard to their contractual obligations. They had no incentive to move

KiwiSaver members out of their default funds because under the Conservative mandate and the

oligopoly relationships between these parties, they could make substantially higher profits retaining

funds in default KiwiSaver funds than moving members out. As set out in our open letter to the

regulators in July 2018, the cross-holdings in bank term deposits meant about on average about 1/3rd

of the funds invested in those default funds was simply invested in themselves, i.e. the banks were

charging a management fee to invest in their own term deposits.

The fundamental reason why the “parking space” is wrong is because the number one objective of

KiwiSaver is to achieve a better financial position for default KiwiSaver members, particularly at

retirement and a conservative fund is one of the worst ways to achieve that goal.

Should the investment mandate options (and other options, for example in relation to fees) 4.apply only to default members who have not made an active choice, or should they also apply to members who have made an active choice to stay in the default fund? Why or why not?

KiwiSaver members who make an active choice should not be able to stay in a default fund. Many

KiwiSaver members have been led to believe that being in a default fund is actually a good choice

because the Government has selected it and marketing by some of parties involved has been

designed to deliberately confuse KiwiSaver members around this point e.g. ASB promotes its

Conservative (default) Fund as the biggest KiwiSaver fund. The same institution in its 2012

submission to the default provider review claimed a study they conducted said that New Zealanders

were more conservative and wanted conservative funds. This is illustrative of how motivated

providers can be to manipulate or persuade customers and the Government. Interesting, though that

OnePath (subsidiary of ANZ), in their submission said that a “traditional life-cycle approach is the

most appropriate investment option for a default fund”.

If a life-stages option is adopted, what “stages” should apply and to which age groups? 5.Should there be a “nursery” period?

A lifestages option is an utterly wrong choice for default funds for the following reasons:

a. On a weight adjusted basis, it will give lower average returns to the member than either Growth or Balanced. The primary reason for this is that when member balances are low, there is little capital in the member’s account to capitalise on the potentially higher returning strategy, but in later life, when member balances are large, lower returns are achieved because of the lower return, when conservative strategies dominate.

b. Lifestages makes no allowance for the increasing investment knowledge of the member. It implies the opposite. As a firm which has dealt with this for more than 20 years, we believe

that with investment experience, clients become unconcerned by short term volatility and do not become risk adverse just because they are getting older.

c. For a person joining KiwiSaver when starting their first job, the aggressive nature of a Lifestages option is not appropriate. KiwiSaver is likely to be their first non-bank account financial asset. These members have low levels of financial literacy and in many cases do not immediately engage with their KiwiSaver, so it is important over the first few years, that the account balance is seen to grow, to build confidence in KiwiSaver and to allow opportunity for further education and engagement.

d. For a person wanting to use KiwiSaver for a first home withdrawal and/or Housing NZ grants, they have a minimum timeframe of three years before being eligible. This timeframe does not support the aggressive nature of a Lifestages option for someone who is aged less than 30. An aggressive investment has a 10+ year timeframe and a large number of KiwiSaver members wanting to use this option will access their KiwiSaver balance within ten years of joining.

e. Lifestages is a marketing ploy designed to suggest that the manager is adding value by making these changes when in fact all they are doing is adding cost and implying that they know better than the KiwiSaver member what is best for them at whatever age they are (which as a model is regularly at odds with the truth).

f. Few members will draw out all their KiwiSaver funds when they turn 65. Most will aim to spread out withdrawals over their lifetime. At age 65, that is at least 15-20 years on average. This does not support having a Conservative fund which a lifestages option would long since put in place.

g. It is impossible to accurately compare lifestages funds available, because the KiwiSaver providers all use different starting points, age brackets and funds used. The performance of any of the lifestages funds is very much more opaque. There are too many variables to facilitate accurate comparisons. This may well suit the fund managers, but definitely does not benefit the member. It also implies that the fund managers have a crystal ball about what is going to happen in markets in the immediate and coming years, which has been proven time and again to be a false assumption.

h. Surely it is not the role of the Government or this committee to decide on what the lifestage bands and fund allocations should be. It puts an inappropriate responsibility on the Government when the industry itself shows no consensus at all about what the appropriate choices are. To illustrate:

NZ Funds runs a 85% Growth/15% Defensive allocation until age 55

AMP runs an Aggressive Fund until age 31, a Growth Fund until 39, a Balanced Fund until 47, a Moderate Balanced Fund until 56, a Moderate Fund until 64 and a Conservative Fund thereafter.

ANZ runs a Growth Fund until age 35, a Balanced Growth Fund until 45, a Balanced Fund until 55, a Conservative Balanced Fund until 60, a Conservative Fund until 64 and a Cash Fund thereafter.

Generate have two lifestage options. Stepping Stones (their more aggressive option) is 100% in two growth funds until age 35, 70% Growth/30% Conservative until age 45,

40% Growth/60% Conservative until age 55, 20% Growth/80% Conservative until 60, and 10% Growth/90% Conservative until 64, 100% Conservative from 65+.

To compound matters, there are no required asset allocation conventions when using such names as ‘Conservative’, ‘Moderate’, ‘Growth’ etc. This would be required if a lifestages approach was used.

Adoption of lifestages would destroy KiwiSaver fund comparisons because there are too many variables, and too much manager self-interest. The notion that a person at age 65 should be in a Conservative or a Cash Fund is generally not in members best interests, given average life expectancies.

If a balanced investment mandate is adopted, what range for growth assets should be 6.applied?

We agree with an allocation of between 50- 60% in growth assets.

If a growth investment mandate is adopted, what range for growth assets should be 7.applied?

We do not support this as an option for default KiwiSaver funds

If a conservative investment mandate is adopted, what range for growth assets should be 8.applied?

We categorically do not support this as an option for default KiwiSaver funds

If a life-stages, growth, or balanced option was adopted, how should we mitigate the 9.potential issue in relation to first-home buyers and other people making early withdrawals?

We only support the use of a balanced fund for default KiwiSaver members.

If market conditions are poor and performance has been poor over or leading up to the minimum

timeframe (three years for first home withdrawal), the Balanced Fund will still have a worthwhile

balance. The home that the first home purchaser is seeking to buy is, in these market conditions,

highly likely to be depressed as well, effectively still giving the member the same real assistance

required to purchase the property.

The Government cannot be expected to protect investors from short term market conditions.

A lifestages option would have by far the biggest potential downside for first home buyers and other

people making early withdrawals.

What would be the administrative costs to providers of choosing a life-stages option? 10.

These would be more than a Balanced option. But, this is a minor disadvantage compared with the

big structural problems of the lifestages approach.

What is your feedback on the different options? Do you agree with our assessment of the 11.costs and benefits of the option? Which option do you think is best and why? Is there another option that we have not considered that would be better than the options discussed?

Disagree with Point 55. It demonstrates how unproven and unsuitable the lifestages approach is for

default KiwiSaver funds. In your footnote 9, this is a repudiation of the normal lifestages approach. It

is lifestages with racing stripes. It also shows the high level of variability in such options, which would

require further definition by the Government. Why should the Government take on the responsibility

of selecting the various aspects of a lifestages approach/models? Not just for the type of fund, but

also for the age brackets used. What the Government needs is for members to become engaged. The

most fundamental reason why a member would become engaged is to determine what type of fund

suits their preferences and situation. This empowers the member over the choices they make. With a

Balanced option, they start from a middle ground. Using a lifestages approach implies that the

investment manager knows better than the member what type of fund they should be invested in all

times during their life, removing the responsibility from the member to take ownership of his/her

own investment strategy. The economy needs educated, informed citizens not dependents who do

not understand investments.

Points 56 and 65 assume that members totally withdraw their KiwiSaver at the age of eligibility

(currently age 65). Our experience is that this is most definitely not the case, and in fact, the

switching to a more conservative approach would more likely undermine their confidence in the lead

up to age 65 because of the low returns they are receiving visa-vie the market generally, encouraging

them to exit KiwiSaver at their earliest convenience, particularly as they have not been engaged prior

to this with the nature of their investment and most importantly, the difference between risk and

volatility. Retirement is not a point in time, it could last 25+ years and KiwiSaver is a perfectly good

investment vehicle for a retiree for the rest of their life, especially an informed, educated investor.

What is your feedback on the level of value that KiwiSaver default members get for their 12.fees? What are the costs that are within and outside a provider’s control? To what extent are fees too high?

The problem isn’t fees, it is the conflict of interest with the major KiwiSaver default providers, who

fundamentally benefit from members remaining in their default fund.

More significant than fees is the PIR tax issue, which is the second biggest scandal in the twelve years

that KiwiSaver has operated, where auto-enrolling members (which includes all default members)

and employers are not informed or educated about PIR rates and the requirements associated with

them, by the IRD and the industry generally. When auto-enrolling members are being taxed at the

highest possible PIR rate, it inevitably has a major impact on the value received by the member from

the default fund. The biggest scandal being the use of conservatively invested default funds.

The majority of default KiwiSaver members are invested with some of New Zealand’s largest financial

institutions, who have demonstrated an inability to complete their contractual obligations as default

providers.

What the fee comparison in point 75 ignores is that the cost for the bank-based default fund

providers to place investments in themselves is pure revenue for the parent company. This is a non-

level playing field for the non-bank default providers, and means that for the Australian-owned

managers, their fees are too high.

AMP, ANZ, ASB, BNZ and BT (Westpac) effectively run a cartel of cross-investing in each others’ bank

term deposits so that on average, at least 30% or more of their default funds are effectively invested

in themselves. We have separately written and detailed this, based on the default fund portfolio

holdings in June 2018.

Is it a problem that fees disproportionately affect those on low income and under 18s? 13.Why/why not?

Yes, but the PIR rate scandal matters more.

The fixed monthly fees disproportionately impact members with low balances. These should be

eliminated for all default fund members.

If the government sets a fee, what should the fee be set at for the different investment 14.mandate options? What considerations, methods or models could be used to determine the fee? What should be the balance between fixed and percentage fees?

A fee ceiling should be set, taking into account our comments in Point 12 above.

What fee arrangements would best promote the objectives of the review? What is your 15.feedback on the fee options? Do you agree with the costs and benefits identified? Which option (or the status quo) do you prefer and why? What other approaches or models could be used to reduce fees?

There is an over-emphasis on fees. Refer attached chart which clearly demonstrates that fund type

matters significantly more than fees, in the main.

How has the number of providers in the default market affected innovation, competition 16.and value-for-money in the default market and in KiwiSaver more generally?

Increasing the number of default funds to nine was a very positive step in terms of allowing non-bank

providers and increasing the flow of funds to NZ owned providers and NZ investments.

Do you agree with our assessment of the costs and benefits of the different approaches for 17.the number of providers? Can you provide us with evidence that might help us quantify the size of the costs and benefits? What option do you prefer and why?

We categorically disagree in Point 118 that having nine providers has resulted in a lack of economics

of scale, higher monitoring costs and wide variation between providers. This is likely to be a self-

serving statement. We believe that the initial six providers received significant incumbency benefits

and they have abused that position by not engaging adequately with members to move them into

more appropriate funds. To remedy the mis-allocation of default funds, a reallocation of default

members should be considered after a specific time. To illustrate, after two years’ membership in a

default fund, a member could be automatically reallocated to another default fund provider that is

meeting the performance guidelines in terms of member engagement and transfers out. There is no

valid reason why there could not be more than nine providers if there are credible options.

The big advantage for New Zealand for more default providers outside the banks is the potential flow

of investment funds directly into New Zealand investments, such as Government and commercial

bonds, and the NZX.

If a “minimum requirements” approach is taken should this be on a period-based or rolling 18.system, and why?

Given the failure to monitor and effectively regulate most of the existing nine providers to

adequately move their members out of default funds, it is appropriate that some more credible

providers be added to the default list. This would assist to reduce the flow of members to non-

performing default providers, which would compliment the reallocation of default members as

discussed in Point 17 above.

Are there higher investment costs for responsible investing? If so, how likely are these costs 19.to contribute to lower net returns?

Yes, there are higher costs. To date the data shows that lower net returns have not resulted.

How does responsible investment affect returns? Does it increase or decrease returns, and 20.to what extent?

See Point 19 and separate submissions from specialist in this area (Matthew Mimms).

Should the default provider arrangements be used to achieve objectives in relation to 21.responsible investment?

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Would default members want their funds to be invested more responsibly? If yes, is the 22.same true if responsible investment means potentially limiting future returns?

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To what extent is it a problem that default members do not have information about whether 23.their investments are made responsibly? Would having more information make a difference to the behaviour of default members? What alternatives might there be to more/standardised information to address responsible investment concerns?

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Do providers’ current responsible investment exclusions meet what default members would 24.expect?

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If this option is adopted, what industries or sectors should be excluded? Should the 25.government instead adopt an international exclusion standard or certification regime? What would be the costs associated with an exclusion or certification regime?

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If this option is adopted, what form should standard disclosure take? For example, should all 26.providers be required to provide a statement listing all excluded companies by sector?

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What is your feedback on our assessment of the costs and benefits of the responsible 27.investment options identified? Which option (or the status quo) do you prefer and why?

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What limitations or problems exist in relation to New Zealand’s capital markets? How could 28.the settings for KiwiSaver default providers be amended to support the development of New

Zealand’s capital markets? How do the liquidity and pricing rules affect default provider investment in alternative New Zealand investments?

The original Australian-owned default providers have shown little inclination to invest in New

Zealand outside investing in their own institutions.

We do not believe the statement in Point 163 is correct, based on our own research into default fund

portfolio composition.

How could the default settings be used to develop New Zealand’s capital markets? What 29.parts of New Zealand’s capital markets are most in need of development?

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Should default funds take an active role in helping develop the New Zealand capital 30.markets? Would this support the purpose of the KiwiSaver Act and the accumulation of retirement savings by default members?

Yes they should, particularly assisting with the funding of local and central Government through

bonds, infrastructure funds and the NZX capital market.

To what extent is the management of default funds currently located in New Zealand or 31.carried out by New Zealand entities?

It is a reach too far for this default fund review to consider this as there are many complex factors.

What is your feedback on a New Zealand-based management option? If this option is 32.adopted, which part of the investment process do you think should be based in New Zealand to help develop New Zealand’s capital markets? What type of mechanism would best give effect to this requirement?

Disagree with the adoption of this option.

What is your feedback on a targeted investment requirement? If the option is adopted, what 33.market should be targeted by an investment requirement (eg early stage companies)?

Leave it to the managers to make those decisions.

What is your feedback on our assessment of the costs and benefits of the options to develop 34.New Zealand’s capital markets? Which option (or the status quo) is best and why? Is there another option that would be better than the options discussed?

What is your feedback on the problem definition for the transfer of members? What other 35.problems are there in relation to the transfer of members?

Agree. All members of an ex-default fund should be reallocated to the other default fund providers.

If default members are transferred from providers with more members to providers with 36.fewer members, how should we decide which members are transferred?

All members of an ex-default fund should be transferred out. No selection process is required, use

the same process as that used now for auto-enrolling KiwiSaver members. You may consider

allocating to any new default provider a higher weighting of these transferring members to assist the

new funds to reach critical mass (e.g. 2 or 3 times the number than for an existing provider).

If transfer option 1 or 2 were adopted, how should default members be given a choice to 37.remain with their current provider for this option?

No choice should be provided.

What is your feedback on the transfer options and the costs and benefits of the options? 38.Which option (or not transferring at all) do you prefer and why? Is there another better option we have not considered?

Option one is too disruptive and penalises members and the remaining default fund providers.

Option two is our preferred option.

Option three rewards non-performance and locks default members in a potentially unsatisfactory

arrangement.

What factors should the review consider in deciding transition timeframes? 39.

Should active defaults be considered default members for the purposes of transfers? How 40.should active defaults be treated and notified of any changes to default provider settings?

No they should not. But, they should not be allowed to make an active choice to remain in a default

fund at all.

What is your feedback on the member education requirements that default providers should 41.have in relation to default members, and how these should be enforced in the instruments of appointment?

When default member engagement levels are so low, focusing on education requirements is

ineffective, as has been demonstrated to date. This expectation needs to be addressed through other

avenues, such as financial literacy in educational institutions.

Employers should be encouraged to have a preferred provider agreement for KiwiSaver and to run

for their staff, financial literacy courses.

What is your feedback on the other requirements that should apply to default members? 42.

Any other feedback? 43.

Get the PIR rate problem for auto-enrolling KiwiSaver members FIXED URGENTLY. Twelve years of

misrepresentation and misapplication of the tax laws is long enough. This is a Government-led failure

and is easily remedied.

It is inappropriate for any default fund to have charitable status or be owned by a Charitable Trust.

Default fund providers should not be exempt from paying income tax. Giving a KiwiSaver licence to a

provider that operates as a Charitable Trust with undefined membership and undefined charitable

causes was a major mistake, because it created an uneven playing field amongst all KiwiSaver

providers and does not contribute to the Government tax take.